SEC Filing Summary
Entity mismatch: The supplied filing is for Second Sight Medical Products, Inc. and its subsidiary, not Vivani Medical, Inc. The summary below reflects the filing’s named registrant.
Business Context and Reporting Period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2017. Second Sight develops, manufactures, and markets the Argus II retinal prosthesis for certain people with severe vision loss. The company also reports development of the Orion visual cortical prosthesis.
Financial Performance and Liquidity
Amounts are in U.S. dollars; financial statement amounts are converted from thousands to millions.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1.61m | $1.18m | $4.86m | $3.27m |
| Gross profit (loss) | $0.61m | ($1.44m) | $1.60m | ($3.50m) |
| Gross margin | 37.8% | (121.6%) | 33.0% | (107.0%) |
| Operating expenses | $7.36m | $7.06m | $22.78m | $19.33m |
| Net loss | ($6.72m) | ($8.49m) | ($21.11m) | ($22.81m) |
| Net loss per share | ($0.12) | ($0.20) | ($0.40) | ($0.57) |
For the first nine months, operating cash used was $17.23m, compared with $18.05m in 2016; investing activities used $2.54m and financing provided $19.88m. Financing included approximately $19.7m net proceeds from a March 2017 rights offering. Cash and money market funds totaled $13.34m at September 30, 2017, versus $10.88m at December 31, 2016. Working capital was $11.6m. Current liabilities were $6.11m; the balance sheet presents no debt balance.
Shares issued and outstanding increased to 56.806m from 42.701m at year-end 2016, principally reflecting the rights offering. The company had 15.130m warrants outstanding at September 30, 2017.
Changes Versus Prior Period
- Q3 sales rose 36% year over year; nine-month sales increased 48%. Nine-month commercial implants rose to 45 from 35, while Q3 implants declined to 12 from 14.
- Nine-month gross profit improved substantially from a prior-year gross loss. Management attributed cost-of-sales movements in part to inventory-reserve reversals and unabsorbed production costs, so the improvement does not solely reflect underlying unit economics.
- Nine-month R&D expense, net of grants, rose 72% to $5.62m, partly because grant offsets fell to $0.24m from $1.99m. Selling and marketing rose 9% and G&A rose 7%; clinical and regulatory expense was roughly flat.
- Operating cash use improved by about $0.82m, but the company continued to incur substantial losses and negative operating cash flow.
Outlook, Risks, and Other Notable Items
- Liquidity and going concern: Management and the auditor cited substantial doubt about the company’s ability to continue as a going concern. Management believed available funds would last through the first quarter of 2018 and said additional debt or equity financing would be needed thereafter; financing was not assured. Without sufficient funds, the company could reduce or discontinue development or clinical programs, pursue alliances that require relinquishing product rights, or cease operations.
- Revenue outlook: Management expected average revenue per implant of $100,000–$120,000 for the rest of 2017 and $90,000–$105,000 in 2018, depending on geographic mix. CMS set the 2018 payment rate for the procedure and Argus II system at $122,500, down from $150,000 for 2017. Management expected Q4 2017 implants to increase from Q3 levels, based on activity and scheduled procedures.
- Commercial and execution risks: Sales depend on reimbursement coverage, which varies by payer and geography. Certain components and services have sole-source suppliers. Customer and geographic revenue concentrations are significant.
- Development: The FDA granted final IDE approval in October 2017 for an Orion I human feasibility study. The company expected initial implants and activation in late 2017 and, if successful, anticipated that the study could support expansion toward a pivotal trial in 2018. In the dry AMD pilot, subjects reported enjoyment and integration of artificial and native vision, but had not demonstrated significant objective benefit over residual vision.
- Accounting and controls: The company had not yet estimated the financial impact of adopting ASC 606, planned for January 1, 2018. Management concluded disclosure controls were ineffective because of material weaknesses, including incomplete control documentation/testing and standard-cost procedures; remediation was ongoing.
- Contingencies: Twenty-one European patent oppositions challenge patents owned or exclusively licensed by the company. Management said successful challenges were not expected to materially affect operations, but could reduce its ability to block competitors from using some patented technology in Europe.
- Other: A third-quarter 2017 inventory-reserve credit and ongoing production under-absorption materially affect reported cost of sales. CFO Thomas B. Miller had submitted his resignation in June 2017 and agreed to remain through a transition period.
Important Facts for Investors to Verify
- Confirm the intended issuer: this filing identifies Second Sight Medical Products, Inc., not Vivani Medical, Inc.
- Review the company’s financing plans, cash runway, and actual cash use relative to the stated first-quarter 2018 runway.
- Assess whether implant volumes, reimbursement coverage, and revenue per implant can support growth, particularly after the 2018 CMS rate reduction.
- Separate recurring product margins from inventory-reserve reversals and unabsorbed production costs.
- Track remediation of internal-control material weaknesses and the effects of ASC 606 adoption.
- Monitor Orion and AMD clinical progress, European patent challenges, and supplier continuity.